US CPI increased 0.6%, with the core rate up 0.7% in May, both hotter than projected and tempering only slightly versus respective gains of 0.8% and 0.9%. These were the biggest increases since August 2008 for headline and one has to go back to January 1992 for the core.
In the meantime, the ECB is sticking to “significantly” higher PEPP purchases. The ECB left the overall policy framework including interest rates and the PEPP envelope unchanged at today’s meeting. The ECB sees stronger growth ahead, but Lagarde highlighted ongoing uncertainty in the initial statement. Inflation is expected to lift short term, but to gradually fall back as temporary factors fade out. The ECB highlighted ongoing significant slack in the economy and Lagarde said inflation is still expected to remain below the ECB’s aim over the forecast horizon. The ECB President also stressed that a sustained rise in market rates could translate into premature tightening in financing conditions. So far then the ECB doesn’t seem to see a real change in the outlook, despite the fact that PMIs signal extremely strong growth. Lagarde did admit that “supply bottlenecks could pose near term headwinds”. At the same time, demand in the services sector is bouncing back and growth should strengthen significantly in the second half of the year. The new ECB growth forecasts foresee growth of 4.6% this year (previously 4%), followed by 4.7% (4.1%) next year. The forecast for 2023 was left unchanged at 2.1%. These are marked upward revisions and the ECB said the risks to the outlook are broadly balanced.
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Stuart Cowell
Head Market Analyst
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